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Tuesday, July 19, 2005
Market Recap
A steady stream of good earnings reports so far this quarter, including IBM yesterday, had the stock market on the move today and small caps running up higher again. The DOW gained 71 points, the NASDAQ was higher by 28 points and the S&P was up 8 points. Many stocks closed at or near the highs of the day. AMGN blew away their earnings estimates after the bell today and is trading much higher after hours. We mentioned that the BTK was forecasting great AMGN earnings when it was moving into new three year highs last week. GILD, MOT, INTC also beat estimates after hours. The only negative was YHOO. This dog only met estimates and as a result, fell sharply after hours and unfortunately is taking GOOG down in sympathy. This is a buying opportunity in GOOG, in my opinion. GOOG's earnings should be very solid on Thursday. I believe GOOG is taking market share from YHOO and growing much faster so the selling in GOOG after hours is overdone. It should bounce back tomorrow when people realize that it is a buying opportunity.
Part 2: When to Sell a Position
Two of the biggest emotions a trader has to overcome are fear and greed. Many traders fall victim to greed once they see a trade become profitable, simply by not having a firm exit point in mind. Some will sell quickly, taking the small profit simply out of fear of losing that profit. For some, greed is the factor. They let it ride and ride and then it starts to fall. Instead of selling to lock in a profit, they wait, hoping that the stock will return to its highs so they can sell it there and feel that they got their maximum profit back. It is human nature to have a desire to buy at the bottom and sell at the top. Not just near the top, but the "exact" top. Instead, the stock keeps going lower and the profits soon melt away and they finally sell out at break-even or even worse, a loss. They let a nice gain disappear because of greed. You will drive yourself crazy if you think about every time you missed selling at the top or missed buying at the bottom. This is almost an impossible task to do on any sort of consistent basis. Far more often then not, you will simply end up missing the trade. In the movies, "greed is good", but in trading, it is an emotion that gets in the way of clear and level headed thinking.
The Easy Answer
There is never an easy answer to the question of when to sell but we think the only logical answer is this. We should always have a plan when we enter a trade. This plan will include two price targets. By looking at the chart, we will find two areas that would make very good sense to sell at. The first and foremost area is the support line. Wherever that is on the chart, your sell stop loss should be place just below support. This, of course, is how you protect your capital and is why this should be the most important sell target. If your entry is correct in the first place, this stop loss target will not be far from your entry and as a result will result in minimal loss if it is reached. Next is the profitable sell target area. That would be near the next resistance line above your entry price. Remember, as we have mentioned in previous commentary, we are looking for a 3:1 ratio of profit to loss probability on every trade. This means that we want a possible $3.00 gain for every $1.00 loss or, if you are counting percentages instead of dollars, you would look for a 15% gain for every 5% loss or a 9% gain for every 3% loss and so on. This can all be calculated on the chart with support and resistance levels. If you find possible trades with these ratios, there is a high probability that your over all trading will be successful.
Lock it in, or Let it Run?
Now, we are advocates of letting the winners run and that is why we do not set price targets to the upside however, this does not mean you should not have a plan to lock in the profit if you should get it. We do this by placing a trailing stop on the position when it reaches the profitability target. In other words, we do not sell it immediately when it reaches resistance because if the stock is strong, we want to give it a chance to work through the resistance level and breakout. This way, we are letting our winner run, should it have enough power to breakout. If it does not have the power to breakout and it reverses to the downside, our trailing stop will be taken out and we will still lock in a profit. So, with this method of using the trailing stop instead of automatically selling at a certain target price, we can have our cake and eat it to by both locking in profits and letting our winners run.
Part 3 Tomorrow
Tomorrow, we look at five different strategies for stop placement. There will be no charts tomorrow because of the length of the commentary.
STHQ Chart Index
If you go to the chart index in the left side menu, you can review and study charts that we have annotated for each stock listed in the past.
For New Members
For all of the new members with us, please make sure to read the link “How to use Bulletin” at the bottom of the Bulletin page on the website. It is critical that you know how to use this trading tool before trying to trade the stocks mentioned. The effectiveness of your trades will diminish if you do not completely understand how the information is presented.
Earnings Calendar
We have added the earnings link for each stock on the bulletin. To access the link for earnings, you can either use the link below or click the link on the bulletin for the corresponding ticker. Click the online bulletin in the left side menu for access to the earning calendar for each stock listed. It is not recommended to hold a position through earnings. You can always buy the stock back after the dust settles.
http://www.earnings.com
Stockcharts Listing
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http://stockcharts.com/def/servlet/Favorites.CServ...
Thank you all for voting.
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